CENTRAL BANK OF BAHRAIN Proposed Amendment Sound Remuneration

CENTRAL BANK OF BAHRAIN

Proposed Amendment

Sound Remuneration Practices for

Licensed Banks

Consultation Paper

06 November 2012

(Deadline for comments: 10th

December 2012)

Consultation Paper: Sound Remuneration Practices for Licensed Banks


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November 2012 Page 1 of 22

CONTENTS

1. Executive Summary

2. Introduction

3. Definitions

4. Effective Governance of Remuneration

5. Effective Alignment of Remuneration with Prudent Risk-Taking

6. Disclosure of Remuneration Practices

7. Next Steps



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1. Executive Summary

1.1. This consultation sets out proposals for sound remuneration practices for CBB

licensed banks. The proposals would apply to all banks. The deadline for

comments is 10th

December 2012.

1.2. The new Directives incorporate the Financial Stability Board (FSB) Principles

for Sound Compensation Practices and their implementation standards. The

Basel Committee on Banking Supervision (BCBS) stresses the importance of

translating international guidance into domestic rules. In line with best

international practice, the Central Bank of Bahrain („the CBB‟) plans to

incorporate these principles and standards into Volumes 1 and 2 of the CBB

Rulebook.

1.3. These new Directives conform to the requirements issued by the Basel

Committee on Banking Supervision (BCBS) and are required as a key

component of an effective banking supervision framework. The Basel

Compensation Principles and Standards Paper and Methodology is available on

the BIS website (http://www.bis.org/publ/bcbs166.htm). To assist banks in

aligning risk and performance to remuneration, the BCBS has issued a further

document which may prove helpful (http://www.bis.org/publ/bcbs194.htm). In

addition, this consultation document incorporates the disclosure requirements

for remuneration as contained in the July 2011 Basel document

(http://www.bis.org/publ/bcbs197.htm).

1.4. Banks will be provided with transitional arrangements for the implementation of

these measures.

1.5. Comments on this consultation paper should be sent electronically to Mr. Ahmed

Al Bassam, Director of Licensing & Policy and Mrs. Ebtisam Al Arrayed, Head

of Policy & Central Risk at “[email protected]” by 10th

December 2012.

mailto:[email protected]



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2. Introduction

2.1. The proposed Principles and standards outlined in this Consultative document

incorporate the Principles and standards outlined by the FSB and are fully

endorsed by the BCBS. These principles and standards will be incorporated as

Directives in the CBB Rulebook and issued under Article 38 of the Central Bank

of Bahrain and Financial Institutions Law 2006 („CBB Law‟).

2.2. This paper supplements existing requirements dealing with the Board of

directors‟ duties and responsibilities when dealing with remuneration practices

as outlined in Chapter HC-5 as well as public disclosure requirements dealing

with corporate governance and transparency included under Section PD-1.3 of

the CBB Rulebook (Volumes 1 & 2).

2.3. This consultation document covers all aspects of remuneration that may have a

bearing on effective risk management including salaries, bonuses, long-term

incentive plans, options, hiring bonuses, severance packages and pension

arrangements.

2.4. The remuneration practices cover approved persons as defined in the CBB

Rulebook as well as material risk-takers.

2.5. The remuneration practices advocated in this consultation document are to

sustain market confidence and promote financial stability through reducing the

incentives for inappropriate risk-taking by banks, and thereby to protect

consumers and the wider economy from the consequences of such inappropriate

risk-taking.

Deferred Remuneration

2.6. The CBB believes that deferred remuneration can work to reduce imprudent or

excessive risk-taking, if it is implemented without limiting appropriate and

reasonable risk-taking for banks.

Consolidated Approach

2.7 Head offices should ensure that their foreign affiliates and branches take steps

so that the remuneration practices are compliant with the policy defined at the

group level. Such steps should include controlling compliance with local rules

that apply to the remuneration schemes of their affiliates and branches.



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3. Definition of Remuneration Policies

“Top-down” or “award-focused” vs “bottom-up” or “payment-

focused”

3.1. Banks typically apply conceptually different strategies when defining their

remuneration policies.

3.2. In a “top-down” or “award-focused” strategy, a bank chooses the amount of its

overall bonus pool for a given year depending on the bank‟s performance and

then allocates the pool among employees, with the allocation depending to a

greater extent, but not entirely, on the contributions of business units and

employees to short-term profit. A portion of bonuses may be deferred, and a

portion of deferred bonuses may be paid in equity-linked instruments such as

stocks or options. The award-focused architecture does not reliably reduce

bank-wide employee remuneration when large losses are experienced on legacy

assets. This is because bonus awards depend on activity during the performance

year, not on legacy losses, and deferred payouts are reduced for poor

performance only if the portion paid in equity-linked instruments is large and if

the bank‟s stock price falls.

3.3. To make bank-wide remuneration more flexible, including the introduction of a

variable downward and/or a „claw-back‟ element, a strategy that takes the

award-focused architecture as given must change either the way awards are

calculated and distributed so that legacy losses are an integral element of bonus

awards, or must change deferral arrangements to make ultimate payouts more

sensitive to subsequent poor firm-wide performance, or both.

3.4. In a “bottom-up” or “payment-focused” strategy,, incentives operate at the level

of individual employees. If unsound risk-taking incentives due to an excessive

focus on short-term results are the problem, then individual employees‟

remuneration arrangements must be altered so that risk influences the amount of

remuneration that employees ultimately receive, not just short-term profit.

Employee risk-taking behaviour is more likely to change if employees expect

their remuneration to be reduced if they take undue risk. The bank-wide bonus

pool will not necessarily be fixed at some fraction of net revenue. The size of the

pool will be the sum of individual employees‟ awards. That is, the awards will

determine the pool rather than the pool determining the awards.



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3.5. Under the bottom-up strategy, Principles 4 and 6 are central because they are

most focused on ways to make individual employee-pay sensitive to risk. They

are also central to any other mechanism. Any employee‟s pay can be risk-

adjusted either by reducing the bonus award as risk rises or by making the

ultimate amount of deferred payouts sensitive to the long-run outcomes of that

employee‟s own risk choices, or both. Risk adjustments are purely for ex ante

risk – bonus awards do not necessarily fall when risk outcomes are bad for

legacy positions.

3.6. In practice, the top-down and bottom-up approaches are in many ways

complementary, and a combination of both is more likely to provide the

optimal incentive alignment in banks, to the extent that both approaches are

applied in a consistent manner over time. The advantage of the payment-

focused approach is its greater potential to change risk-taking behaviour. While

the award-focused approach requires less work and innovation on the part of

banks and thus may be more feasible, it may have little impact on the risk-taking

incentives of most employees.

3.7. It should be noted that the implications of the two approaches differ the most for

mid-level and lower-level employees. At the level of senior executives, the two

approaches may be rather similar operationally.



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4. Effective Governance of Remuneration

4.1 The CBB believes that it is essential that banks have in place an effective

governance of the remuneration policy.

Principle 1:

The bank‟s board of directors must actively oversee the remuneration system‟s

design and operation for approved persons as well as material risk-takers. The

chief executive officer and management team should not primarily control the

remuneration system. Members of the remuneration committee must have

independence of any risk taking function or committees, and it therefore

follows that they must be non-executive, independent, directors. Principle 2:

The bank‟s board of directors must approve, monitor and review the

remuneration system to ensure the system operates as intended. The

remuneration system must include effective controls. The practical operation

of the system must be regularly reviewed for compliance with regulations,

internal policies and bank procedures. Remuneration outcomes, risk

measurements, and risk outcomes must be regularly reviewed for consistency

with the Board approved risk appetite.

4.2. The Remuneration Committee must carefully evaluate practices by which

remuneration is paid for potential future revenues whose timing and likelihood

remain uncertain. In so doing, it must demonstrate that its decisions are

consistent with an assessment of the bank‟s financial condition and future

prospects.

4.3. The Remuneration Committee must approve the remuneration package of all

approved persons, and all material risk takers.

4.4. The external auditor must conduct an annual remuneration audit that is

conducted independently of management and submitted directly to the CBB.

The audit must assess compliance with the CBB principles on remuneration, and

the results must be disclosed in the annual report. An example of a positive

audit may be one that outlines how the bank‟s remuneration payout schedules

are sensitive to the time horizon of risks and variable remuneration is adjusted

accordingly. An example of a negative audit may be one that notes that the bank

has failed to implement the requirement that a minimum of 50% of the variable

compensation must be awarded in shares or share-linked instruments.

4.5. The Board‟s remuneration must be fixed so that total remuneration (including

sitting fees) must not exceed 5% of the bank‟s net profit in any financial year.

Board sitting fees must be limited to a maximum of BD500 per person for

attending each meeting.



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4.6. The following criteria will be used by the CBB in assessing whether the bank

complies with Principles 1 and 2:

(a) Whether the remuneration policy is aligned with the risk management

framework of the bank;

(b) Whether the Board of directors has approved and annually reviewed the

remuneration policy;

(c) Whether the Board Remuneration Committee has approved and submitted

to the Board its recommendations regarding remunerations;

(d) Whether the remuneration to be paid to the highest paid employees of the

bank are based on a pre-determined materiality threshold;

(e) Whether the Board Remuneration Committee‟s approval of remuneration

was made independent of advice provided by senior management;

(f) Whether the Board Remuneration Committee has unfettered access to

information and analyses from risk and control function personnel (e.g.

risk management, finance, compliance, internal audit and human

resources);

(g) Whether the Board Remuneration Committee has engaged appropriate

control function personnel in its deliberations and to what extent;

(h) Whether the Board Remuneration Committee has formally stress tested

and back-tested the remuneration policy on an annual basis; and

(i) Whether the external auditors, through their annual audit of remunerations

made or to be made, have assessed the remuneration policy‟s compliance

with the CBB‟s principles on remuneration including:

i) Ensuring that all material remuneration plans/programs (including

those for senior managers and employees whose actions have a

material impact on the risk exposure of the bank) are covered;

ii) Assessing the appropriateness of the plans/programs relative to

organisational goals, objectives and risk profile of the bank; and

iii) Assessing the appropriateness of remuneration payouts in relation to

the risks in the business undertaken.



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Principle 3:

The bank‟s approved persons engaged in control functions must be

independent, have appropriate authority, and be remunerated in a manner

that is independent of the business areas they oversee and commensurate

with their key role in the bank. Effective independence and appropriate

authority of such staff are necessary to preserve the integrity of financial

and risk management‟s influence on incentive remuneration.

4.7. For employees in the control functions:

(a) Remuneration must be determined independently of other business areas

and be adequate to attract qualified and experienced staff; and

(b) Performance measures must be based principally on the achievement of

the objectives and targets, if any, of their functions.


complies with Principle 3:

(a) The remuneration structure of control function personnel must not

compromise their independence or create conflicts of interest in either

carrying out an advice function to the Board Remuneration Committee or

their control functions;

(b) Whether the remuneration of control function personnel was based on

function-specific objectives and not determined by the individual financial

performance of the business areas they monitor;

(c) Whether control function personnel have been placed in a position where,

for example, approving a transaction, making decisions or giving advice

on risk and financial control matters could be linked to their performance-

based remuneration;

(d) Whether the control function management, as opposed to business line

management, had the responsibility for the performance appraisal process,

including preparation and sign off on the performance appraisal

documents, for control function personnel;

(e) Whether the Board Risk Management, Audit, Remuneration and

Nominating committees have been actively engaged in control function

personnel performance reviews in relation to their responsibility;

(f) Whether the remuneration levels of control function personnel, as

compared to those of the professionals of the monitored business areas,

are sufficient to carry out their function effectively;

(g) Whether the mix of fixed and variable remuneration for control function

personnel has been weighted in favour of fixed remuneration; and

(h) Whether the control function personnel have the appropriate level of

authority.



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5. Effective Alignment of Remuneration with Prudent Risk-Taking

Principle 4: Remuneration must be adjusted for all types of risk. Two employees who

generate the same short-run profit but take different amounts of risk on behalf

of their bank should not be treated the same by the remuneration system. In

general, both quantitative measures and human judgement should play a role in

determining risk adjustments. Risk adjustments should account for all types of

risk, including intangible and difficult-to-measure risks such as reputation risk,

liquidity risk, and the cost of capital.

Banks‟ remuneration policies and practices should aim to reduce employees‟

incentives to take excessive and undue risk.

5.1. Banks must ensure that total variable remuneration does not limit their ability

to strengthen their capital base. The extent to which capital needs to be built

up should be a function of a bank‟s current capital position and its ICAP.

5.2. The size of the variable remuneration pool and its allocation within the bank

must take into account the full range of current and potential risks, and in

particular:

(a) The cost and quantity of capital required to support the risks taken;

(b) The cost and quantity of the liquidity risk assumed in the conduct of

business; and

(c) Consistency of the liquidity risk assumed in the conduct of business.

5.3. Paragraph 5.2 focuses on the overall size of the variable remuneration, at the

overall bank level, in order to ensure that the recognition and accrual of

variable remuneration will not compromise the financial soundness of the bank.

It should also be emphasised that the accrual and deferral of variable

remuneration does not oblige the bank to pay the variable remuneration,

particularly when the anticipated outcome has not materialised or the bank‟s

financial position does not support such payments.



(a) Whether the bank has assessed the impact of remuneration recognition

and accrual on its capital planning and overall capital assessment process

(ICAP), taking also into account their current capital position;

(b) Whether the bank has taken into account all significant and material risks,

differentiating among risks affecting the bank as whole, the business unit,

and the individual. When evaluating whether all material types of risks

are taken into account, the context and approach matters. Though banks

usually bear many types of risk, at the level of individual employees or

business units only some types of risk may be either significant or

material;



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(c) Whether the bank has taken into account all the risk management results

and outputs in adjusting remunerations;

(d) Whether a wide variety of measures of credit, market and liquidity risk

have been used in implementing risk adjustments. For example:

i) Adjustments for credit and market risk can be done by economic

capital allocations, combined with a cost-of-capital. An example of

a performance measure that incorporates this risk-adjustment is

Profits Adjusted for the Cost of Capital Employed;

ii) Adjustment for liquidity risk can be done by calculating stressed

liquidity coverage ratios, combined with cost-of-liquidity, where the

cost of liquidity is the cost of unsecured funds matching the liquidity

characteristics of the assets funded. A performance metric that

incorporates this risk-adjustment is Profits Adjusted for the Cost of

Liquidity Employed; and

iii) Other measures can be used depending on applicability and

suitability.

(e) Whether the bank has in place measures or policies to treat the “difficult-

to-measure” risks. Reputational and other risks may also be material but

may be especially challenging to include in risk adjustments. Even for the

main risks, in some situations, risk measurements may not be sufficiently

robust to support good risk adjustments. In these instances, banks may

consider whether other strategies or policies can be used to align risk-

taking incentives, such as deferral;

(f) Whether severe risks or stress conditions have been taken into account.

For example, conventional historical-simulation value-at-risk measures

based on short historical periods are known to understate the severity of

bad-tail risks in many situations. Stress-scenario measures are an

alternative if the scenarios are severe;

(g) Whether the time horizon was taken into consideration in the risk

adjustment process used to measure performance and the quality of the

performance measure used. More stringent risk adjustments may be

needed where measurement periods are short (and few losses are taken

into account) than where measurement periods are long (and a large

proportion of ultimate losses are already taken into account in the

performance measure);



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(h) Whether the degree of risk adjustment that is needed varies according to

the nature of performance measures that influence variable remuneration.

Financial performance measures are particularly important because they

are often short-term;

(i) Whether performance measures take into account the quality of revenues

that are used in constructing these measures, and, in particular, special

attention must be paid to cases in which the performance measures have

the effect of accelerating future revenues forward in time. Treating

uncertain, long-term revenues as though they are certain and already

received can increase the tendency of performance measures to give

employees incentives to take long-term risk. In that case, stronger risk

adjustments are needed;

(j) Whether variable remuneration is sensitive to employees‟ performance

with respect to conduct and behaviour. Unethical or unacceptable/bad

behaviour should be enough to override good financial performance and

diminish remuneration;

(k) Whether performance measures and risk adjustments have been tailored to

the level and duties of employees. As an example, performance measures

and risk adjustments for a specialised employee such as a trader are likely

to work best when they focus on the employee‟s own activities. For the

director of a business line, measures and adjustments for the business line

as a whole are appropriate, perhaps with the addition of measures and

adjustments for the bank as a whole. For senior executives, measures and

adjustments should be for the bank as a whole;

(l) Whether total shareholders return for the period was used in the case of

senior executives or in setting the size of a bank-wide bonus pool.

However, these measures do not fully take risk into account and should be

used in conjunction with other measures. Relative measures amongst or

across peer groups do not take into account absolute performance and thus

could result in perverse variable remuneration payments in market

downturns; and

(m) Whether the bank‟s risk adjustment methods have both quantitative and

judgemental elements.



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.

Principle 5: Remuneration outcomes must be symmetric with risk outcomes.

Remuneration systems must link the size of the bonus pool to the overall

performance of the bank. Employees‟ incentive payments must be linked

to the contribution of the individual and business to such performance.

Bonuses must diminish or be deferred in the event of poor bank, divisional

or business unit performance.

5.7. Subdued or negative financial performance of the bank should generally lead to

a considerable contraction of the bank‟s total variable remuneration, taking into

account both current remuneration and reductions in payouts of amounts

previously earned, including through malus or clawback arrangements1. Banks

should however recognise the performance of staff who have achieved their

targets or better, by way of deferred compensation, which may be paid once the

bank‟s performance improves.

5.8. For senior management as well as other employees whose actions have a

material impact on the risk exposure of the bank:

(a) A substantial proportion of remuneration must be variable and paid on the

basis of individual, business-unit and bank-wide measures that adequately

measure performance; and

(b) These proportions must increase significantly along with the level of

seniority and/or responsibility.

5.9. Guaranteed remuneration is not consistent with sound risk management or the

pay-for-performance principle and must not be a part of prospective

remuneration plans and policies. Exceptional minimum variable compensation

must only occur in the context of hiring new staff and be limited to the first

year.

5.10. Existing contractual payments related to a termination of employment should be

re-examined, and kept in place only if there is a clear basis for concluding that

they are aligned with long-term value creation and prudent risk-taking;

prospectively, any such payments must be related to performance achieved over

time and designed in a way that does not reward failure.

1 A “clawback” requires that an employee (or ex-employee) return to the bank the remuneration that

was previously paid out to him/her. A “malus” is a feature of a remuneration arrangement that reduces

the amount of a deferred bonus, so that the amount of the payout is less than the amount of the bonus

award. What is important is that banks‟ remuneration policies include practical and enforceable ways

to reduce amounts of awards of variable pay that are ultimately paid to, and retained by, employees

when risk outcomes are worse than expected.



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5.11. Banks must demand from their employees that they commit themselves not to

use personal hedging strategies or remuneration- and liability-related insurance

to undermine the risk alignment effects embedded in their remuneration

arrangements. To this end, banks must, where necessary, establish appropriate

compliance arrangements.

5.12. In assessing whether the bank complies with Principle 5, the CBB will take into

account the criteria used in assessing compliance with Principle 4.

Principle 6:

Remuneration payout schedules must be sensitive to the time horizon of

risks. Profits and losses of different activities of a bank are realised over

different periods of time. Variable remuneration payments must be

deferred accordingly. Payments must not be finalised over short periods

where risks are realised over long periods. Management must question

payouts for income that cannot be realised or whose likelihood of

realisation remains uncertain at the time of payout.

5.13. For approved persons as well as other employees whose actions have a material

impact on the risk exposure of the bank:

(a) At least 40% of the variable remuneration, must be payable under

deferral arrangements over a period of at least 5 years; and

(b) The proportions of variable remuneration must increase significantly

along with the level of seniority and/or responsibility. For the CEO, his

deputies and the other 5 most highly paid business line employees, at least

60% of the variable remuneration must be deferred for at least 5 years.

5.14. The deferral period referred to above must not be less than three years, provided

that the period is correctly aligned with the nature of the business, its risks and

the activities of the employee in question. Remuneration payable under deferral

arrangements should generally vest no faster than on a pro rata basis.

5.15. In the event of negative contributions of the bank and/or relevant line of

business in any year during the vesting period, any unvested portions are to be

clawed back, subject to the realised performance of the bank and the business

line.



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(a) Whether the value of ultimate payouts was sensitive to risk outcomes, as

well as to performance, during the whole of the deferral period. Such

arrangements might increase payouts if risk outcomes are unusually good,

but they should substantially reduce payouts if risk outcomes are

unusually bad. The criteria for increased payouts should be sufficiently

demanding to ensure that the payouts are not disproportionate to the

improved risk and performance outcomes;

(b) Whether the deferral period and the manner in which payouts are spread

over time match the time horizons of risks and the objective of a particular

deferred remuneration instrument.

(c) Whether the deferral arrangements of variable remuneration are in line

with the minimum 5-year deferral period and consider the crystallisation

of risks over several years;

(d) Whether deferral arrangements have both top-down and bottom-up

elements, with the relative importance of the two elements depending

upon the employee‟s organisational level, functional level, and pay level.

The top-down elements will link payouts to the performance of risk

outcomes for the individual employee‟s activities or those of the

employee‟s specific business unit; and

(e) Whether the variable compensation for the CEO and his deputies and the

5 most highly paid employees is in line with the minimum 60%

requirement of total remuneration and minimum 40% requirement for

other positions covered by these requirements.

Principle 7:

The mix of cash, equity and other forms of remuneration must be

consistent with risk alignment. The mix will vary depending on the

employee‟s position and role. The bank should be able to explain the

rationale for its mix to the CBB.

5.17. As a minimum, 50 percent of variable remuneration (including both the deferred

and undeferred portions of the variable remuneration) must be awarded in shares

or share-linked instruments (or, where appropriate, other non-cash instruments).

These instruments create incentives aligned with long-term value creation and

the time horizon of risk. Awards in shares or share-linked instruments must be

subject to a minimum share retention policy of 5 years from the time the shares

are awarded.

5.18. Where fixed or variable remuneration include common shares, the shares

awarded must be limited to an annual aggregate limit of 10% of the total issued

shares outstanding of the bank, at all times.

5.19. The remaining portion of the deferred remuneration can be paid as cash

remuneration vesting over a minimum three year period.



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(a) Whether the bank has identified which instruments create incentives

aligned with long-term value creation and the time horizons of risk.

These instruments might not be the same for all employees;

(b) Whether the bank has ensured that 50% of the variable remuneration is

paid in the form of shares or share-liked instruments which must be

retained for a minimum 5-year period and which is in line with the

maximum annual aggregate limit of 10% of total shares outstanding; and

(c) Whether the bank has in place a reasonable rationale for its mix.



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6. Disclosure of Remuneration Policies and Practices

Principle 8: Banks must disclose clear, comprehensive and timely information about

their remuneration policies and practices to facilitate constructive

engagement by all stakeholders. Stakeholders need to be able to evaluate

the quality of support for the bank‟s strategy and risk posture.

Appropriate disclosure related to risk management and other control

systems will enable a bank‟s stakeholders to make informed decisions

about their business relations with the bank.

6.1. Banks must disclose in their annual report qualitative and quantitative

information about their remuneration practices and policies covering the

following areas:

(a) The governance/committee structures;

(b) The frequency of review of the remuneration structure;

(c) Information relating to the bodies that oversee remuneration. Disclosures

must include:

i) Name, composition and mandate of the main body overseeing

remuneration;

ii) Whether external consultants‟ advice has been sought and by whom

in the bank and in what areas of the remuneration process the

consultants have been involved; and

iii) A description of the bank‟s remuneration policy, including the extent

to which it is applicable to foreign subsidiaries and branches;

(d) The independence of remuneration for control functions staff;

(e) The risk adjustment methodologies;

(f) The link between remuneration and performance;

(g) The long-term performance measures (deferral, malus, clawback);

(h) The types of remuneration (cash/equity, fixed/variable);

(i) Information relating to the design and structure of remuneration processes.

Disclosures must include:

i) An overview of the key features and objectives of the remuneration

policy;

ii) Whether the remuneration committee reviewed the bank‟s

remuneration policy during the past year, and if so, an overview of

any changes that were made; and

iii) A discussion of how the bank ensures that approved persons engaged

in control functions are remunerated independently of the business

units they oversee;



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(j) Description of the ways in which the current and future risks are taken

into account in the remuneration processes. Disclosures must include:

(i) An overview of the key risks that the bank takes into account

when implementing remuneration measures;

(ii) An overview of the nature and type of the key measures used to

take account of these risks, including risks difficult to measure;

(iii) A discussion on the ways in which these measures affect

remuneration; and

(iv) A discussion of how the nature and type of these measures have

changed over the past year and reasons for the change, as well as

the impact of changes on remuneration;

(k) Description of the ways in which the bank seeks to link performance

during a performance measurement period with levels of remuneration.

Disclosures must include:

(i) An overview of main performance metrics for bank, top-level

business lines and individuals;

(ii) A discussion of how amounts of individual remuneration are

linked to bank-wide and individual performance; and

(iii) A discussion of the measures the bank will in general implement

to adjust remuneration in the event that performance metrics are

weak2;

(l) Description of the ways in which the bank seeks to adjust remuneration to

take account of longer term performance. Disclosures must include;

(i) A discussion of the bank‟s policy on deferral and vesting of

variable remuneration and, if the fraction of variable remuneration

that is deffered differs across employees or groups of employees,

a description of the factors that determine the fraction and their

relative importance;

(ii) A discussion of the bank‟s policy and criteria for adjusting

deferred remuneration before vesting and after vesting through

clawback arrangements;

(m) Description of the different forms of variable remuneration that the bank

utilises and the rationale for using these different forms. Disclosures must

include:

(i) An overview of the forms of variable remuneration offered (i.e.

cash, shares and share-linked instruments and other forms3);and

(ii) A discussion of the use of the different forms of variable

remuneration and, if the mix of different forms of variable

remuneration differs across employees or group of employees, a

description of the factors that determine the mix and their relative

importance;

(n) Number of meetings held by the main body overseeing remuneration

during the financial year and remuneration paid to its members;

(o) Number and total amount of remuneration for the financial year split into

fixed and variable remuneration;

2 This should include the bank‟s criteria for determining weak performance metrics.

3 A description of the elements corresponding to other forms of variable remuneration must be provided.



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(p) Number and total amount of variable remuneration awarded during the

financial year, split into cash, shares and share-linked instruments and

other;

(q) Number and total amount of guaranteed bonuses awarded during the

financial year;

(r) Number and total amount of sign-on awards made during the financial

year;

(s) Number and total amount of severance payments made during the

financial year, and highest such award to a single person;

(t) Total amount of outstanding deferred remuneration, split into cash, shares

and share-linked instruments and other forms; and

(u) Total amount of deferred remuneration awarded during the financial year,

paid out and reduced through performance adjustments.

Disclosure of remuneration practices must cover approved persons (Board

members, approved persons in business lines and approved persons in control

functions) and material risk takers and must be broken down between these

four categories.

6.3. For items (n) to (u) in item 6.2, the information must be provided for the

current as well as for the previous financial year.

6.4. The quantitative information required under items 6.2 (o) and (p) may be

presented in a table format (see below) split between members of the Board

and other approved persons, as well as other material risk takers:

Table A to be completed separately for (a) members of the Board, (b) approved

persons other than board members and (c) other material risk takers.

Table A

Total value of remuneration

awards for the current fiscal

year

Unrestricted

Deferred

Fixed remuneration

Cash-based x x

Shares and share-linked

instruments

x x

Other x x

Variable remuneration

Cash-based x x

Shares and share-linked

instruments

x x

Other x x



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6.5. Banks must provide to the CBB details of total remuneration including the mix

of fixed and variable remuneration as per Appendix 1. The report must be

submitted semi-annually for the period covering 1st January to 30

th June and 1

st

July to 31st December. This report must be provided within 2 months of the

end of the semi-annual period.

6.6. Banks must provide to the CBB details of its top 12 highly remunerated

employees semi-annually for the period covering 1st January to 30

th June and

1st July to 31

st December. This report must be provided within 2 months of the

end of the semi-annual period and must be in the format as outlined in

Appendix 2.



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7. Next Steps 7.1. In their comments, banks should provide detailed explanations of any

challenges they foresee in complying with the proposed rules.

7.2. Banks will be requested to undertake a detailed self-assessment to check

compliance with the directives on remuneration and to indicate the detailed

steps and timeline taken by the banks to comply where non-compliance is an

issue.

7.3. Following receipt of comments on this consultation paper, the CBB will amend

Volumes 1 and 2 of the CBB Rulebook.



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APPENDIX-1

DETAILS OF REMUNERATION PAID

FOR THE HALF-YEAR/YEAR ENDED

30th

JUNE/31ST

DECEMBER

(BD in „000) Categories of

Employees

No. of

Employees

Fixed Remuneration Variable Remuneration Total

Remuneration

Salaries

and

Wages

Other

Benefits/

Allowances

Total Performance

Bonuses (in

Cash)

Performance

Bonuses (in

Shares)

Other

Performance

Linked

Incentives

Deferred

Compensation

paid during

the period

Others Total

Approved persons

(requiring CBB

approval)

Employees engaged in

risk taking Activities

(business areas)

Employees engaged in

control functions

Other employee

Outsourced

Empl./Service

providers (engaged in

risk taking activities)

TOTAL

Note: Amounts of outstanding deferred remuneration (split into vested and unvested), new sign-on and severance payments made during the

period and number of beneficiaries of such payments should be given by way of footnote.



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APPENDIX -2

DETAILS OF REMUNERATION PAID

FOR THE HALF-YEAR/YEAR ENDED

30th

JUNE/31ST

DECEMBER

(BD in „000) Serial No. Names of

Employees

Fixed Remuneration Variable Remuneration Total

Remuneration

Salaries Other

Benefits/

Allowances

Total Performance

Bonuses (in

Cash)

Performance

Bonuses (in

Shares)

Other

Performance

Linked

Incentives

Deferred

Compensation

paid during

the period

Others Total

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

TOTAL

CENTRAL BANK OF BAHRAIN Proposed Amendment Sound Remuneration

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